Bob's Gutsy Leadership Blog

Toshiba: Why Do Smart People Do Dumb Things?

Toshiba was founded in 1873 as Japan’s first maker of telegraph equipment. Its reputation grew over the years as it became the countries first producer of lightbulbs and eventually into a behemoth that manufactures everything from washing machines to medical equipment and computer chips.

Back in 2008, the U.S. Congress badly wanted to restart the dormant nuclear industry in the U.S. They began to offer attractive loan guarantees and other incentives to make this happen. Seeing the opportunity, Toshiba bought Westinghouse and signed deals to build four reactors. Toshiba was confident that Westinghouse’s new, but untested, modular design technology would provide significant efficiencies.

Realizing that Westinghouse could not handle major projects on its own, Toshiba turned to a contractor, the Shaw Group, who was a newcomer to nuclear work. Shaw had recently bought Stone and Webster (S&W) at a bankruptcy auction. S&W was an engineering company that had built many U.S. nuclear reactors in the 1950’s and 60’s. Unfortunately, at the time Shaw acquired S&W, all of that old expertise was gone but Shaw was confident that the name alone would provide credibility in the nuclear field.

Soon after Shaw’s construction work on the new reactors began, Toshiba bought Shaw. At that point, things began to go downhill. By early 2012, the Nuclear Regulatory Commission was reporting problems such as improperly installed steel and faulty welds. It quickly became clear that Shaw lacked the experience in the nuclear industry to carry out what they had promised. For the next four years, there was minimal progress, leaving Toshiba with massive liabilities related to the various projects.

That brings us to today’s crisis. The projects that Toshiba’s Westinghouse subsidiary signed up for are in a chaotic condition. The cost overruns are enormous, running into the multiple billions of dollars. In fact, Toshiba will be reporting a loss of $9 billion for the fiscal year ending March 3. In an attempt to survive, Toshiba has already sold off its consumer electronics and medical equipment businesses and is now selling its last remaining crown jewel: its flash memory business.

So why is all of this happening to Toshiba? The answer is quite simple: pride and arrogance. This caused Toshiba management to do a pathetic job in due diligence in its purchase of Westinghouse, followed by years of mis-management of the projects.

Over and over you see successful executives becoming over-confident and getting incredibly sloppy. It seems their belief is that once you become successful, you are entitled to continued success, without doing the hard work that is required to maintain success. The wise leader realizes this fundamental flaw in human nature!